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With its record-setting IPO, the Industrial and Commercial Bank of China (ICBC) has convinced investors the future is bright. The new challenge for the bank is to win over its own customers. As the country prepares to deregulate consumer banking by the end of the year, China's banks will face foreign competition for Chinese savers holding some 325 million accounts totalling nearly US$1.8 trillion.

In the face of that competition, the ICBC and China's other banks will be playing by a new set of rules. They can win if they keep focused on their customers.

China's retail banking segment is set to take off. Mortgage loans have been increasing by nearly 60 per cent annually since 2000. Home lending is forecast to grow to US$725 billion by 2010 with after-tax profits exceeding US$3 billion. But as banking grows, customer satisfaction is dropping. This was a key finding of a Bain & Company survey of nearly 7,500 customers at 20 Chinese domestic, State-owned and publicly traded joint-stock banks in eight major cities.

When we asked Chinese bank customers how likely they were to recommend their bank to a friend or colleague, promoters outnumbered detractors by only 4 percentage points, yet our research shows that customer advocacy is the single most reliable predictor of organic growth. There's an important message here for banks.

In the new world of China banking, the "big four" State-owned giants Bank of China, China Construction Bank, the ICBC and the Agricultural Bank of China will have room for improvement. They all ranked below our study average. More promising are the city commercial banks, nine of which ranked among the top 10 in our customer survey.

The most urgent issue for Chinese banks is how to hang on to the wealthiest 20 per cent of urban households some 75 million strong with annual incomes exceeding US$2,500. Although just 2 per cent of banks' customers, they account for more than half of all profits.
Foreign banks will initially be allowed to compete only for China residents' timed deposits exceeding US$125,000. Thus, these customers will be the target.

Identifying those customers and appealing to them with quality service will become a critical part of the entry strategy for foreign banks, particularly since the biggest retention weapon of the "big four" is their extensive distribution through branch networks which overseas banks cannot easily duplicate. One way to counter is the approach taken by Hong Kong's Standard Chartered Bank, which is concentrating on the biggest cities on the Chinese mainland and is introducing services such as personal financial advisers, foreign-currency investment products, and a dedicated 24-hour customer hotline.

In fact, many Chinese banks have taken a narrow view of the value of their customers. They have had little reason to see themselves as anything more than deposit takers. With the coming changes, they will need to think systematically about how to grow the customer relationship from a savings account holder, for instance, to a small mortgage customer or a credit card user.

Already a few banks are starting to redesign some of their products to broaden business with current customers. Bank of Shanghai, a city institution in which HSBC owns an 8 per cent stake, talked to customers before becoming the first to offer credit cards denominated in a foreign currency, as well as home, car and personal loans. The expanded range of products has helped Bank of Shanghai to achieve the highest loyalty rating in the city.

As China's banks make such important moves to win customers, they would be wise to consider a key finding in our survey. Nearly half of the customers we surveyed told us that three basic attributes mattered most the convenience and quality of the branch network, how long they must wait in lines, and the helpfulness of staff.

For China's traditional banking culture, building a customer-based mindset is a major shift in focus. But as China's banks seek ways to hang onto restless depositors after December's changeover, paying attention to customers will be the best way to turn disaffected depositors into loyal promoters.